Every major sector in the benchmark S&P/TSX Composite Index has done worse than its U.S. counterpart this year, suggesting it’s not just unlucky index composition that’s plaguing the market, the usual scapegoat whenever Canadian stocks are lagging.

The TSX is down 3.7 per cent this year, versus a 3.3 per cent gain in the S&P 500, after the worst January for the Canadian index since 2010. Less than one-fifth of stocks have outperformed the S&P 500 Index — the lowest number in two decades.

“The easy answer is to look at the composition and say, well, the TSX doesn’t have what’s working and therefore we’re going to underperform,” said Robert Kavcic, senior economist at BMO Capital Markets. “But when you go below the surface, there’s something more going on than just composition.”

Composition is certainly playing a part. The S&P/TSX is heavily weighted toward financials, energy and materials, which together make up more than two-thirds of the benchmark. Energy in particular has been a chronic underperformer, as the gap between Canadian and U.S. crude prices is the widest since 2013.

At the same time, the S&P/TSX is light on technology and health-care stocks, which have been huge drivers of the U.S. rally. Together, those sectors make up just 4.5 per cent of the Canadian market compared with 38 per cent of the S&P 500.

“The composition component is one that’s chronic for the domestic market, but is really showing its stripes in this environment,” said Craig Fehr, Canadian investment strategist at Edward Jones & Co.

Multiple Negatives

The obvious culprit is U.S. tax reform, which has led to upward earnings revisions across most sectors and a broad repricing of shares south of the border, while having little to no impact in Canada.

But the divergence goes beyond that. While the U.S. was cutting tax rates, three of Canada’s biggest provinces hiked their minimum wage. While the U.S. dollar fell 3.4 per cent against major world currencies in January, making exports more competitive, the loonie rose to its highest level since September. And while Canada’s economy was the hottest of the Group of Seven last year, it’s expected to decelerate this year as U.S. growth picks up.

Add to this worries about the future of the North American Free Trade Agreement, high Canadian consumer debt levels and tighter mortgage-lending rules and it’s not surprising that Canadian stocks can’t keep up.

Settle Down

Strategists expect Canada to close the performance gap eventually, but it won’t be because stocks suddenly start to soar.

“Realistically you’ll probably see equity markets in the U.S. settle down rather than Canada all of a sudden starting to run at a 20 per cent year-over-year pace and catching up,” Kavcic said.

That may have started on Friday when U.S. stocks plunged 2.1 per cent amid worries about rising interest rates, and Canadian stocks fell 1.6 per cent.